The US equity markets experienced notable gains this week as anxieties over the economy subsided, particularly following encouraging reports on inflation and retail sales that bolster predictions of a soft economic landing. The Dow Jones Industrial Average concluded the week at 40,659.76, reflecting an increase from the previous week's closing of 39,497.54.
Meanwhile, the Nasdaq Composite surged to 17,631.72, a significant rise from 16,745.3 a week prior, and the S&P 500 advanced to 5,554.25 from 5,344.16. These upward movements in major indices are indicative of growing investor confidence as fears of a recession diminish. In another sign of market stability, the CBOE Volatility Index (VIX) fell by 2.6%, settling at 14.85 late Friday.
This decrease continues the trend of retreat from the high volatility levels previously reached, which spiked over 65 after disappointing economic indicators suggested a potential hard landing. As noted in a report by UBS, "VIX has now achieved two records over the last week – the fastest 25-plus point spike from lows, and now the fastest retracement from that spike in history.” This implies a rapidly shifting market sentiment, showcasing resilience amidst ongoing uncertainties. The two-year Treasury yield, often viewed as a reflection of Federal Reserve monetary policy, is anticipated to finish the week on a higher note as macroeconomic indicators suggest that while consumer activity may be under pressure, it is far from diminishing.
Conversely, the 10-year Treasury yield was slightly below its closing level from the prior week, illustrating mixed signals in the bond market that align with investor expectations of economic performance. Inflation statistics released earlier in the week revealed a deceleration in price pressures, pointing toward a potential soft economic landing.
This situation gives the Federal Reserve a reason to contemplate interest rate cuts, albeit with caution. Retail sales for July outpaced expectations, as indicated by data released on Thursday. Additionally, the University of Michigan's preliminary consumer sentiment index for July exceeded market forecasts on Friday, further reinforcing a sense of optimism. The probability of a 50 basis-point interest rate cut in the US, scheduled for September 18, has diminished from 51% to 26% by Friday afternoon, according to the CME Group's FedWatch Tool.
The market now largely anticipates a more tempered 25 basis-point reduction instead. Analysts, including Jefferies US economist Thomas Simons, acknowledge that despite the encouraging trends in the July Consumer Price Index (CPI), the Federal Reserve’s decision to cut by 25 basis points remains viable.
However, the unexpectedly strong shelter measures serve as a reminder for the Fed to maintain a cautious approach as they navigate through this easing cycle. In a broader context, the movement of $US30 and $US500, as recorded in the global financial markets, continues to reflect the intertwined relationship between consumer sentiment, retail performance, and interest rate speculation, showcasing a complex landscape for investors.
As market stakeholders continue to assess these evolving scenarios, the outlook remains promising, with a significant focus on the Federal Reserve's upcoming decisions based on the steady stream of economic data..